How To Ensure An Angel Or VC Is The Right Match For You

Forbes Woman
I write about the success factors of women entrepreneurs.

Like marriage, the relationship between an entrepreneur and her investor can go wrong. The relationship is more than just money and it’s important to know if you’re compatible. “You may not be getting married forever, but you are shacking up for a long time,” said Lori Hoberman, Chair of the Emerging Companies / Venture Capital practice, Chadbourne & Parke.

Your investors are going to get to know you beyond just reading your pro formas and talking with you. You need to get to know them. "When an entrepreneur takes outside capital it's the start of, in most cases, a good long-term relationship,” said Adam Quinton, active angel investor and CFO of NopSec, which identifies and fixes IT security vulnerabilities. “But all relationships can go sour.”

Do your homework

“Do reference checks with CEOs of the companies the investor has invested in,” said Leonora Valvo, former CEO of etouches, a cloud-based events management software company. “In particular that means talking to CEOs the investor has backed ... but not the ones that did well. Everyone is happy there. Rather, talk to the CEOs whose businesses had tough times ... and find out how the investor handled that," said Quinton.

Photo Credit: Daniel P. Fleming

Many investors will offer to make the introduction. “It’s a telltale sign, if the investor won’t facilitate the introduction.” said Hoberman. Even better, if you know someone (or know someone who knows someone) who will talk candidly about the investor.

Ask the tough questions

“Don't do perfunctory reference calls,” writes Greg Gottesman in Business Insider. “Ask if that CEO would take the investor's money again. Ask about strengths and weaknesses. Ask about how that investor reacts when times are tough. Ask if the CEO calls that investor when he or she is dealing with an important issue.”

Pick up cues during the negotiations process

“How does the investor handle push back from the entrepreneur,” said Hoberman. The negotiations process should be a two-way street. “Does the investor play a zero sum winner-take-all-game?” said Valvo. This is indicative of what the investor will be like once on your board.

Listen to your gut

You’re going to be working with the investor for a good number of years. Ask yourself some questions before you hop into bed. Can you work with the investor over the next several years? Do you like the investor? Do you trust him or her? Does s/he bring real value to your company? Are your expectations, vision, and objectives for the company in sync?

Keep your eye on the prize -- scaling your business

“Once you put your allies on your board, they become responsible for the business and not to you,” said Amy Millman, president, of Springboard Enterprises, which coaches, showcases, and supports women-led growth companies seeking equity investors. “Keep your lines of communications open with each of your board members and, while you don't need a weatherman, it's important to keep your eyes and ears attuned to which way the wind is blowing.”

Keep investors informed

Investors want to know how the company is doing, whatever the news. “An email every other week with an update -- bad or good -- is usually enough,” said Hoberman. “This helps build trust. Be transparent and don’t hide anything. Remember that they are taking a leap of faith too.”

Entrepreneurs should be choosy about whose money they take. Make certain that you really know your investor. Understand his or her motivation and expectations for exit strategy and ROI (return on investment). Know what added value they can bring to the table. Knowledgeable investors with good connections can jump-start a company and keep it thriving. Well-connected investors can even make it easier to get additional rounds of financing.